Risk sentiment has weakened with only bad news emanating from the Middle East conflict and the Strait of Hormuz remaining effectively closed. Brent crude has pushed up through USD105, US equities are weaker, US rates are a little higher and the USD is broadly stronger. The NZD has underperformed, trading around 0.5865 and lower on all the key crosses.
Focus remains on the Middle East and US and Iran remain in a stalemate maintaining their blockade in the Strait of Hormuz. The US navy continues its operations to prevent any Iranian-linked vessel from delivering oil. The US navy boarded a supertanker carrying Iranian oil in the Indian ocean. President Trump ordered the US navy to shoot any boat putting mines in the Strait.
Israel recognises that the job hasn’t been done and the defence minister said, “we are wating for a green light from the US first and foremost to complete the elimination of the Khamenei dynasty”, return Iran to the dark ages by destroying key energy and electric facilities and threatening Iran with “different, lethal” strikes.
Adding to weaker risk sentiment, there was an Israeli news report that Iran’s Parliament Chairman Ghalibaf resigned from the negotiation team following the intervention of the Revolutionary Guards. Unlike the IRGC, he has been amenable to ending the war. Another Israeli news source said the IRGC is in control and Khamenei is not functioning as Supreme Leader.
The Telegraph reported that Trump has eight days (until 1 May) before he will be forced to make up his mind on Iran, due to the 1973 War Powers Resolution which limits his ability to wage war without congressional approval for 60 days. His four options at that point will be to seek congressional authorisation to continue the war, start winding down US involvement, buy some breathing space, or ignore the law.
Against a backdrop of ongoing negative headlines on the war, oil prices have sustained their recent move higher with Brent crude pushing up through USD105. US equities are weaker, with the S&P500 currently down 0.3% and the Nasdaq index down 0.7%.
US Treasury yields have pushed higher, up as much as 4-5bps through to 10-years maturity before fading. The 10-year rate is currently 4.32%, little changed from the NZ close.
Economic data releases remain a sideshow, but for the record global PMI data were mixed. The early April readings for the US were stronger than expected for both manufacturing and services, rising to 54.0 and 51.3 respectively, alongside a further push higher in the input and output price indicators. UK figures were also stronger than expected, with manufacturing gaining to 53.6 and services up to 52.0. In the euro area, manufacturing was also stronger, but the services PMI was much weaker at 47.4.
The overall message is that the war has yet to significantly make its mark on the global economy although the European economy is more exposed than the UK and the US and this is being felt across the services sector.
Reflecting the risk-off mood, the USD is broadly stronger. Moves have been small for most, but with notable underperformance for the NZD as it unwinds its gain seen in the wake of stronger CPI data earlier this week. The NZD fell to a low of 0.5840 and is currently 0.5865. The AUD has weakened to 0.7140 and NZD/AUD has fallen to 0.8210.
After reaching 0.5050 yesterday, NZD/EUR has fallen to 0.5015. NZD/GBP has weakened to 0.4350 and NZD/JPY is down at 93.5.
Yesterday, Moody’s decision to downgrade NZ’s sovereign credit rating outlook from stable to negative, following a similar action by Fitch Ratings last month, did not prompt any market response. NZ’s fiscal accounts are experiencing pressure, much like those of many of its peers, meaning the country does not stand out in this regard. As a result, there are minimal implications for demand for NZ bonds. Indeed, there was good bidding interest in the weekly bond tender, particularly for the 4-year bonds where there were over $1b of bids for the $250m on offer.
Finance Minister Willis used the opportunity of Moody’s downgrade to argue for fiscal responsibility, “we cannot just keep spending more and borrowing more”. She also said that, unusually, the Treasury will reopen its economic forecasts that were prepared ahead of the Budget and the advice she had received was that “NZ’s economic recovery is delayed but not derailed”.
Higher domestic rates yesterday largely reflected global forces. NZGB yields closed the day up 4-5bps while swap rates were 4bps higher across most of the curve, with the 2-year rate closing at 3.51% and the 10-year rate at 4.33%.
On the economic calendar, Japan CPI, UK and Canadian retail sales, Germany’s IFO survey and the final reading for the University of Michigan consumer survey are released.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
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